Everyone wants to be on the road to a comfortable retirement. Knowing how to get there is a different story. A recent survey revealed that many Canadians have some big disconnects when it comes to achieving their financial goals.
Natixis Global Asset Management’s 2016 Global Survey of Individual Investors reached out to 7,100 investors in 21 countries, including Canada, to gauge their attitudes towards investing and retirement readiness. Through this annual survey, David Goodsell, Executive Director of Natixis Global Asset Management’s Durable Portfolio Construction Research Center, has gained crucial insights that shape Natixis’ advisor- and client-focused solutions.
Clinging to the myth of the risk-free 12% return
At first glance, some of the 2016 survey results may not appear positive, but Goodsell insists they represent an outstanding opportunity for advisors to demonstrate value by helping clients adopt the right perspective and position their portfolios for long-term success.
The survey revealed that 84% of Canadian investors, if given the choice of safety or performance in their portfolios, will choose safety. Furthermore, 64% of investors say protecting capital is more important than growing assets (36%). This may not be a surprise for advisors.
However, what may be surprising is that when asked what level of investment return they need to meet their financial goals, Canadians expect a return of 9.3% above inflation – that’s a staggering 11% to 12% in real returns. While market volatility affords opportunities to earn strong returns, 59% of Canadians consider volatility an obstacle to achieving their financial objectives and 50% admit struggling to avoid emotional investment decisions in volatile times.
Playing it safe isn’t safe at all
As Goodsell observes, this is a significant disconnect between return expectations and risk tolerance levels.
“Canadians are among the world’s most conservative investors,” says Goodsell, “and their desire for high investment returns doesn’t align with their mindset. They need to re-assess their expectations or introduce ‘riskier’ assets into their portfolios to reach their long-term goals.”
Goodsell believes Canadians’ see risk through absolute measures. Rather than viewing risk and volatility as opportunities for investment growth, Canadians are more prone to define risk as a “loss of capital.” When markets decline, Canadians tend to move their assets into cash and cash equivalents.
“Investors might feel safer in the short term, but the long-term risk is a failure to generate sufficient returns to fund their retirement,” says Goodsell. “Outliving your money (i.e., ‘longevity risk’) can be a consequence of investing too conservatively.”
Client therapy and the new-world advisor
When it comes to risk and returns, Canadian investors want to have their cake and eat it too. To help clients fix this disconnect, advisors need to be part teacher, coach and therapist. That’s the evolving nature of the business. Left to their own devices, investors default to safety and may fall short of their long-term goals. Advisors must persuade clients that – with the right solutions – “risk” isn’t always “risky”. When advisors help their clients effectively understand and manage portfolio risk and volatility, they show anxious clients that investment growth doesn’t have to be a white-knuckle ride, and is crucial for meeting their long-term financial needs.
“A key tenet of Durable Portfolio Construction is to consider investment strategies in terms of risk before returns,” explains Goodsell. “To improve the risk-return profile of a portfolio, look for complementary investments with low correlations, and apply a consistent portfolio construction process.”
In addition to offering effective risk-management solutions, advisors can help clients avoid emotional investment decisions by being a calming voice of reason in times of extreme market volatility. “Clients crave reassurance and personalized advice when markets are challenging. They want you to recommend ideas for what they should do next in their portfolios, and then explain why you’re making these recommendations,” says Goodsell.
Learn more about the Natixis approach to portfolio construction at durableportfolios.com, and get more fresh insights from the survey in an upcoming article.
Source: Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February-March 2016. Survey included 7,100 investors from 21 countries, 300 of whom are Canadian investors.
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